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4 minutes read. Published on January 30, 2023.
Written by Rebecca Betterton Written by Auto Loans Reporter
Rebecca Betterton is the auto loans reporter for Bankrate. She is a specialist in helping readers in navigating the ins and outs of securely taking out loans to buy the car they want.
Edited by Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate since the end of 2021. They are committed to helping readers gain confidence to manage their finances with clear, well-researched information that breaks down complicated topics into bite-sized pieces.
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Purchasing a vehicle takes more than just deciding to purchase an SUV or a sedan in black or red. If you’re buying the vehicle using the help of a loan it is also necessary decide on what repayment terms make the most fit to meet your budget and financial objectives. Car prices are still steep in comparison to the time before that COVID-19 epidemic. The median cost of a brand new car for December of 2022 was more than $49,500, which is 5 percent more expensive than the same month one year earlier , and more than 20 percent higher than in December 2020 . The longer your loan term — typically between 24 and , which is between two and seven years, the less expensive your monthly payment will be. But be aware that a lower monthly payment has negatives, and could cost you more in the long term. For most drivers, a long-term car loan is not a great choice. The reasons to stay clear of taking out a long-term loan The longer-term loans are appealing because the monthly payments will be smaller than those with short-term loan. Though they allow you to buy a more expensive vehicle, they also make the payments affordable, long-term car loans can place you in a more difficult spot financially If you’re not careful. It is more likely that you will end up upside down with a loan A longer loan term means you are more likely to become upside down sometime in the near future. Being upside on a car loan is when you are owing more than the vehicle is worth. This is due to the fact that a larger portion of the monthly payment at the beginning of the loan will be used to pay interest instead of the principal owed. A loan that is upside down could be dangerous for several reasons. If you had an accident in which the car is considered a total loss, you may end up paying off the loan on a car that you can no longer drive if the insurance won’t cover it. Additionally that the longer you’re upside down on the car loan as well, the more time you’re in negative equity. Trading in a car with negative equity is a sign that you will not have enough cash to pay off the loan — you might even need to take out. Vehicle depreciation Depreciation isn’t a major issue with used cars since a within the first few years. But, long-term loans on cars that are used don’t work. The car you are buying has a significant number of miles on it, and a longer-term loan will allow the miles to increase. Consider, for instance, that you purchase a vehicle that’s three years old that has 36,000 miles that’s what the typical American would drive in this amount of time. If you get a six-year loan and you drive 12,000 miles a year, which is the average in America, you would add 72,000 miles. That means your car would have 108,000 miles, and could be close to 10 years old by the time you pay it off. If you opt to sell it earlier and you find that it’s not worth much or, worse, you don’t have any equity at all. The longer-term loans with higher interest typically have a higher rate of interest . This is due to the fact that longer loans are more risky for lenders. With a protracted loan period it is more likely that something might impact your financial situation prior to the loan is paid back in full. Even if the interest rate for an extended loan is the same as a shorter term however, you’ll still have to be paying more interest over the course of the loan because you will be making interest payments for a far longer period. While your bank account may be relieved by the lower cost, the price may not be worth the cost. This is a crucial consideration as it is the case that Federal Reserve continues to to address pandemic-related inflation. When the Fed increases benchmark rates, it raises the interest rates that private lenders provide for personal loans and auto loans. The median new loan rates for 2022 were 5.16 percent . However, rates ranged from 3.84 per cent for those who have the best credit scores, to 12.93 percent for borrowers with the lowest or most subprime scores. Are you stuck with the same car? Before signing off on an auto loan that’s up to 84 months, ensure you’ve and consider whether you will want to use the same car throughout the duration. Seven years is a long time. Your requirements and needs could shift. However, if you take out a long-term loan, you will remain in the same vehicle. In most cases you will have to pay the loan can cost you money. Alternatives to a longer-term vehicle loan There are other alternatives to get a vehicle without taking the risk that comes along with a lengthy car loan. Lease a vehicle If you’re having trouble getting an approval for an affordable loan, you may . leasing can help you pay lower monthly payments. Even drivers with fair credit are more likely to get the lease they want and drive an incredibly new car. The disadvantages of leasing are important to take note of. They have limitations on how far you can drive the vehicle throughout the lease and fees for excessive wear and tear. Most important is that you’ll need to either return or replace the vehicle at lease’s conclusion. Co-signing with a person who has good credit provides potential lenders with additional assurance that you will pay off your loan. This makes you more likely to get approval even if your credit is imperfect. Consider a large down payment If your goal is to reduce your monthly expenses and save money, a high down payment is a great option. The larger the amount you deposit initially then the less your monthly payment will be. Also, you are likely to receive more favorable interest rates with your lender. Is a long-term car loan worthwhile? A long-term car loan is not usually an ideal option due to the increased risk to your finances. While the lower monthly payment on a long-term car loan may be appealing at first, it is better to save up some additional cash to boost the down payment or to choose a car that is less costly and ensure that the monthly cost is more affordable with a shorter loan. When you are deciding to sign on to a long-term car loan, consider the downsides. In addition to costing extra over the duration of the loan and a possible risk of up becoming upside down on the loan . What’s more, your vehicle needs could be different within five to seven years when you’re still paying off that loan. Consider the options for long-term loans, such as making a bigger down payment or leasing a vehicle, or obtaining a co-signer with a credit score can help you achieve more favorable loan terms.
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Written by Auto Loans Reporter
Rebecca Betterton is the auto loans reporter for Bankrate. She has a specialization in helping readers to navigate the ins and outs of securely using loans to buy a car.
Editor: Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate since late 2021. They are passionate about helping readers gain the confidence to manage their finances through providing precise, well-researched and well-structured information that breaks down otherwise complex topics into manageable bites.
Auto loans editor
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